Slow engineering construction a legacy of GFC

Australian engineering construction may have bounced back in the December quarter but growth in the sector is likely to remain flat as the legacy of the global financial crisis endures.

Total engineering construction was up 8.6 per cent on the previous quarter, and 14.5 per cent on the same time last year in seasonally adjusted estimates, according to the Australian Bureau of Statistics.

But industry analyst BIS Shrapnel warns that growth in the sector will remain modest well into the middle of the decade, as a decline in public spending offsets major resources projects.

“The next upswing in non-mining civil infrastructure spending will be closer to the middle of this decade, offsetting somewhat declining mining-related works at that time," BIS senior manager, infrastructure and mining, Adrian Hart says.

That mid-decade upswing would be driven by the roll-out of the national broadband network, as well as flood recovery in Queensland.

And while growth in engineering construction plummeted from 19 per cent to just 2.8 per cent during financial year 2009-10, growth is still sitting well above historical averages, with construction volumes twice that of 2004.

Investment is at a record high, with the BIS Engineering Construction in Australia, 2010-11 –2024-25 report estimating the nation will spend $100 billion each year in the next three years, with mining-related infrastructure accounting for half that figure.

Hart told TheAustralian Financial Review stalled engineering construction was the legacy of the global financial crisis, where some projects postponed were yet to begin and government stimulus was being rapidly curtailed.

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But the sector had proved remarkably resilient, sustained by strong demand for Australian resources and a vast outlay of government stimulus.

“While the sector lived off many ‘mega’ projects which began before the GFC and were sustained (for example, Sino iron ore, Pluto LNG, the Worsley alumina expansion), activity has also been supported by the start of new projects such as the Wonthaggi desalination plant, the ramping up of the Gorgon KNG project, and pre-commencement works on other major mining and energy projects," the report says.

Those projects were sustained, BIS says, by continued strong demand for resources thanks to global bailout measures, and also weaker construction costs which reduced the overheads on major project start-ups.

Significant investment in the next few years will be dominated by the private sector as governments seek to rebalance their books post financial crisis.

State by state, outlooks are mixed

Not surprisingly, Queensland is set to be the big spender on infrastructure as it begins major rebuilding after the summer’s devastating floods.

“Some of that is emergency maintenance, but three quarters or more will be total reconstruction of major infrastructure, which will provide a substantial boost."

Resources investment will also boost construction.

“In LNG, two big projects, and a third on the table, will drive new infrastructure in northern Queensland," Hart says. That includes Santos’s proposed Gladstone LNG project, recently granted environmental approvals.

But growth in Western Australia, NSW and South Australia will be effected by the wrap up of several mega projects that are now completed or close to completion.

In WA, Woodside’s $14 billion Pluto liquid natural gas project will begin operations in August, with the Sino iron ore project and Worsley Alumina expansion also due for completion this year.

In NSW, the $1.9 billion Kurnell desalination plant is complete, and port expansions at Port Botany and Newcastle are due to conclude within months.

Hart flagged water investment as an area where growth was likely to flatten after years of high levels of investment.

“Water-related construction activity will move lower through the next few years as major desalination projects come to an end," he says.

“Sydney now doesn’t need another desal plant, and Melbourne doesn’t need another desal plant, because there’s already been so much investment in that area."

In South Australia, growth hangs on the outcome of
BHP Billiton
’s planned Olympic Dam expansion, which last month moved into its feasibility study phase.

If expansion goes ahead, it will fill the vacuum left by the soon-to be completed Adelaide desalination plant and Christies Beach waste water treatement plant expansion.

Roll-out of the NBN has boosted levels in Tasmania, while the Northern Territory, like SA, relies on approval of a major project, the Ichthys LNG development.

Victoria is the only state set for rapid decline towards 2013 as the Wonthaggi desalination plant moves towards completion.